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STUDIO ONE MEDIA, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The discussion and financial statements contained herein are for the six months
ended December 31, 2011 and 2010. The following discussion regarding the
financial statements of the Company should be read in conjunction with the
financial statements of the Company included herewith.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Quarterly Report (the "Report") includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, and Section 21E
of the Securities Exchange Act of 1934, as amended, and as contemplated under
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements may relate to such matters as the Company's (and its subsidiaries)
business strategies, continued growth in the Company's markets, projections, and
anticipated trends in the Company's business and the industry in which it
operates anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products and services, anticipated
market performance and similar matters. All statements herein contained in this
Report, other than statements of historical fact, are forward-looking
statements.
When used in this Report, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," "budget," "budgeted," "believe,"
"will," "intends," "seeks," "goals," "forecast," and similar words and
expressions are intended to identify forward-looking statements regarding
events, conditions, and financial trends that may affect our future plans of
operations, business strategy, operating results, and financial position. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. We caution our readers that a variety of factors could
cause our actual results to differ materially from the anticipated results or
other matters expressed in the forward looking statements, including those
factors described under "Risk Factors" and elsewhere herein. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this Report will in fact transpire or prove to be
accurate. These risks and uncertainties, many of which are beyond our control,
include:
· the sufficiency of existing capital resources and our ability to raise
additional capital to fund cash requirements for future operations;
· uncertainties involved in growth and growth rate of our operations,
business, revenues, operating margins, costs, expenses and acceptance
of any products or services;
· volatility of the stock market, particularly within the technology
sector;
· our dilution related to all equity grants to employees and
non-employees;
· that we will continue to make significant capital expenditure
investments;
· that we will continue to make investments and acquisitions;
· the sufficiency of our existing cash and cash generated from
operations;
· the increase of sales and marketing and general and administrative
expenses in the future;
· the growth in advertising revenues from our websites and studios will
be achievable and sustainable;
· that seasonal fluctuations in Internet usage and traditional
advertising seasonality are likely to affect our business; and
· general economic conditions.
Although we believe the expectations reflected in these forward-looking
statements are reasonable, such expectations cannot guarantee future results,
levels of activity, performance or achievements. We urge you not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Report.
All references in this report to "we," "our," "us," the "Company" or "Studio
One" refer to Studio One Media, Inc. and its subsidiaries and predecessors.
DESCRIPTION OF BUSINESS.
General
Corporate Background
We are a Delaware public company traded on the Over-The-Counter Bulletin Board
(ticker symbol: SOMD). As of December 31, 2011, there were 33,570,779 shares of
Common Stock issued and outstanding. From April 2006 to December 31, 2011, we
have raised approximately $20.2 million in the form of equity for purposes of
research and development, the launch of MyStudio and AfterMaster and general
corporate purposes. The Company's office and principal place of business is
located at 7650 E. Evans Road, Suite C, Scottsdale, Arizona 85260 USA, and its
telephone number is (480) 556-9303.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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Business
Studio One Media, Inc. ("Studio One" or the "Company") is a diversified media
and technology company. The Company's wholly-owned subsidiaries include
MyStudio, Inc. and AfterMaster HD Audio Labs, Inc. The Company and its
subsidiaries are engaged in the development and commercialization of
proprietary, leading-edge audio and video technologies for professional and
consumer use, including MyStudio® HD Recording Studios and AfterMaster TM HD
Audio.
The Company has the ability to generate revenue from four key sources: (1)
MyStudio recording sessions; (2) digital advertising and sponsorship
opportunities; (3) website advertising revenues; and (4) mastering or
"AfterMastering" of new music as well as existing catalog music.
The Company believes that Studio One's award winning and groundbreaking
audio/video technologies and unique business models have the potential to have a
significant impact in the entertainment and social media sectors.
Business Update
Financial results for the first half of fiscal 2012 were below our projected
targets as the Company embarked on several initiatives, in recent months, which
included defining our product, staffing, pricing, marketing and demographics.
These initiatives included testing of off-site session purchases, promotional
sessions, multiple fee changes and staffing, all of which had a significant
impact on sales. In addition, the Company did not undertake barter or marketing
initiatives during the first quarter of our fiscal year and had only limited
barter activity during the second quarter. However, with the new initiatives in
place, the Company is currently on-track to report increased sales for the
remaining fiscal year.
Television Production Agreement
In December 2011, the Company signed an agreement with one of North America's
largest television and movie production companies for the co-development of a
television show for national broadcast. The plan for the television show is to
use content produced by MyStudio users to showcase their talents in a variety of
categories (e.g., music and comedy).
We are very pleased to be working with the aforementioned television production
company as it has had a great rate of success in getting television shows
produced and aired on major television networks. Its stature and reach as an
international television "powerhouse" provides additional credibility to the
quality of our studios and the opportunity for the show to be a success.
The production of a national television show such as this has been a long-time
goal of the Company's management team. We believe that such a show will allow
for significant national and international exposure for MyStudio and thus drive
substantially higher studio revenues. Based on the success of the show and the
low-cost of production, there is a significant possibility of rolling out such a
format into many international markets.
Strategic Partnerships
In addition to the planned upcoming television production using MyStudio user
generated content, we have devoted a substantial amount of time and resources to
the development of high-profile strategic partnerships that will create national
exposure for MyStudio and thereby ultimately drive paying traffic to the
studios. MyStudio requires broad-based consumer awareness that can only come
from strategic alliances and partnerships which will bring exposure to our
product and brand on television and other mainstream mediums.
When we initially installed a studio in our corporate showroom in Hollywood, our
objective was to bring entertainment and music executives to our office to allow
them to experience MyStudio and understand its quality and capabilities. This
effort has created significant opportunities for the Company. The quality and
functionality have always been well received by such executives, as well as an
understanding of the efficiencies and cost savings opportunities available from
using MyStudio to identify talent. However, the one of the greatest challenges
to date has been introducing a new technology to an existing longstanding
audition process to the entertainment industry and general public while having a
minimal number of studios. We believe we are making progress into gaining
greater brand awareness by installing more studios and partnering with some of
the biggest names in the entertainment industry.
We have also been in discussions with various other parties interested in using
MyStudio's content as part of a yet to be created variety show that would
feature the videos. We view this as an exciting opportunity to broaden the brand
awareness of MyStudio and drive additional traffic to the studios.
The availability of the studio audition process is seven days a week, 11 hours a
day. The high-quality of the videos, high fidelity audio of the studios and the
less stressful auditioning environment all contribute to the success of those
auditioning using MyStudio. The locations and mall hours of the studios
allow for greater flexibility for those unable to attend the broader "open
calls" due to other commitments, such as work and family.
Numerous other contests using the MyStudio technologies were hosted during the
year, including music, modeling and comedy, and discussions are being held with
other interested parties about using the studios for their upcoming productions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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The X Factor
In April 2011, we announced our strategic partnership with The X Factor for its
inaugural season in the United States. Led by Simon Cowell, a highly acclaimed
entertainment entrepreneur and music producer with a notable ability to identify
some of the world's top musical talent, The X Factor has had tremendous success
in Europe. The X Factor in the United States first aired in September 2011. Over
the next four months, the show featured some of the most talented aspiring
singers ever performing in a national talent contest. Coached by some of the top
names in the music industry, the participants continued to improve upon their
existing skills and gain significant exposure for their future careers.
It has been reported that over 75,000 people auditioned for the first season of
the show, including several thousand who participated in such auditions through
MyStudio. A positively disproportionate number of MyStudio auditioners made it
to all X Factor elimination levels, including three of the MyStudio acts making
it into the top 32 nationally televised contestants. One of the MyStudio
contestants, Drew Ryniewicz, made it into the top 3 girl finalists.
Mr. Cowell recognized the significant opportunity provided by MyStudio in
broadening the contestant base for his show. MyStudio allowed for contestants to
visit six additional venues beyond the primary casting cities to participate in
the audition process. The studios were so successful in identifying top quality
talent that Mr. Cowell twice extended the audition process via the studios. As
we install additional studios throughout the U.S. during fiscal 2012 and beyond,
we believe MyStudio will play an even greater role in the identification of top
talent for such television shows.
The X Factor partnership allowed the Company to conduct its first high-profile,
multi-week audition program for a major television show and test the
effectiveness of its proprietary technologies and audition process. The
MyStudio/X Factor auditions conclusively proved MyStudio's statistical and
operational advantages over highly publicized large scale open auditions. The
absence of promotional lead-time and marketing support for the MyStudio
auditions made the metrics even more significant.
The X Factor auditions provided the Company with valuable empirical data that
demonstrates the advantages that MyStudio's unique audition system has in
discovering and organizing quality talent over large scale open auditions. The
quality of talent is the backbone of all television talent-based programs, and
the Company believes that the metrics it achieved for The X Factor will be
impetus that leads to more widespread use of MyStudio in talent-related
entertainment programs.
Word of MyStudio's success with The X Factor auditions has been recognized by
other companies in the television industry, and we have subsequently been
contacted by major television producers about utilizing MyStudio in their
upcoming shows. We believe that the adoption of our technology by The X Factor
and the success of the MyStudio auditions will initiate a favorable change in
the way talent is identified and underscores the importance of our multi-year
marketing effort to the entertainment industry.
As we embark upon on an accelerated roll-out plan, we believe that MyStudio can
play an even greater role and produce an even higher percentage of top talent
for The X Factor and other productions if provided with the proper marketing,
exposure and resources. The television exposure expected through the X Factor
relationship has and will be valuable to creating brand recognition and
awareness for MyStudio.
In conjunction with The X Factor, we soon expect to announce the audition dates
for the 2012 season. Unlike the past year, the Company expects to be able to
charge users for their auditions. With a larger studio base, existing favorable
familiarity with the show and the high-quality talent that was identified from
MyStudio users, we believe this could be a very significant revenue opportunity
for the Company in 2012 and beyond.
Additional Strategic Opportunities
We are currently in negotiations with a major entertainment company for the
placement of studios on their entertainment properties for use by their guests.
Based on the large number of persons visiting these locations, this could be a
very successful partnership for the parties, while gaining significant brand
exposure for MyStudio. This could be the first of many such studio placement
opportunities both domestically and internationally.
We are also in discussions on a strategic partnership with a major social
networking company for the co-promotion of MyStudio to enhance the content on
its website. The other party has a large global user base that can greatly
benefit from the high quality of the videos produced at MyStudio.
Additionally, we are in negotiations with well known properties in major market
areas for the placement of new or existing studios on a rent free/revenue share
basis. This will greatly improve brand recognition, increase sales, and reduce
operating costs significantly.
Based on limited availability of marketing dollars, the Company has worked hard
to identify industry leaders for its strategic partnerships which allow for
significant national marketing exposure without incurring major cash outlays.
Studios
In November 2011, we opened our seventh studio, which is located in the
Westfield Garden State Plaza ("GSP") in Paramus, New Jersey. GSP is one of the
largest shopping malls in the greater New York City area. This mall boasts
over 20 million annual patrons, many of which commute in from Manhattan. This
new site was selected based on its access to the New York area and the large
number of persons that shop at this mall each year. The location provides ease
of access by musicians, models and other aspiring entertainers throughout this
highly populated area, and thus has the potential to be the most frequented
studio in the Company's system.
In addition to the GSP studio, we have studios located in Phoenix, Honolulu,
Nashville, Kansas City, Denver and Hollywood.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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In addition to our installed studio base, we have taken possession of three
additional studio chassis and are in the process of preparing them for
installation in early 2012. Our manufacturing partner for the studio chassis is
working to complete the production of an additional 11 units. Our new
manufacturing relationship has allowed us to realize significant cost savings in
the overall studio construction costs. Subject to the availability of adequate
capital, we expect to accelerate the roll-out of the studios. The Company would
like to have at least 25 studios installed by the end of calendar year 2012,
including at least two additional studios prior to the start of the next X
Factor auditions.
We continue to receive significant inbound interest for MyStudio from around the
globe. Our near-term focus has been gaining critical mass of studios in the
United States to allow us to attract key strategic partners, such as The X
Factor. We are evaluating opportunities from international parties, as well as
other means of accelerating the broad roll-out of MyStudio.
Advertising
We expect to gain further marketing exposure from The X Factor and the other
strategic partnerships in progress, thereby creating additional brand awareness
for the Company. Moreover, our association with The X Factor and having multiple
locations in key markets has generated substantial interest by advertisers in
renting the on-studio advertising space. Such advertising represents an
important revenue opportunity for the Company and its profitability. Management
is devoting resources to capitalize on this advertising interest. We expect to
have 10 studios installed in major US markets in early calendar 2012 and believe
that this further strengthens our ability to generate significant revenue from
national advertisers.
AfterMaster
Over the past year, we have also generated substantial interest in AfterMaster
among music and consumer electronics companies. The feedback from music industry
executives, leading artists, mastering houses and top consumer products
companies has been exceptional. Many have stated that AfterMaster is one of the
most exciting new developments in digital audio technology. We are working
closely with such parties in the broad adoption of AfterMaster to make it the
standard in the digital music industry. It is our belief that 2012 will be a
significant turning point in the broad commercialization of our technologies.
The AfterMaster process for mastering audio makes music significantly louder,
fuller and clearer than traditionally mastered music. The technology is a
proprietary, patents-pending combination of hardware and software and can be
applied on virtually all audio sources including, music, radio, television and
film.
In the past fiscal year, the Company began generating revenues from this new
product. The AfterMaster technology has been used on music by Janet Jackson and
Lady Gaga and many others.
We believe AfterMaster creates three new revenue opportunities for the Company:
• The mastering ("AfterMastering") of music created by professional musicians,
as well as sounds and dialogues in motion pictures and television;
• A consumer-based version of AfterMaster for music created by amateur musicians
that could not otherwise afford to have such music professionally mastered.
• Embedding the AfterMaster technology into a chip for use in consumer
electronics.
We believe our technology has the potential for record labels to generate
significant additional revenue from the re-releases of their catalogues, while
providing listeners with a significantly better listening experience. The
feedback from the record labels has been very favorable. We are in discussions
with major record labels and music distribution companies regarding the use of
our technologies for broad commercial use.
In addition to our focus on utilizing AfterMaster for professional use by the
music industry, we are in the process of introducing a consumer version of our
technology for use by amateur musicians and other consumers. Consumers will be
able to upload their music to a specially designed consumer AfterMaster website
and have it mastered with unprecedented quality at an affordable price point. We
priced this product to appeal to a very broad audience, both domestically and
internationally. We are currently in negotiations with a social media network
company that has over five million amateur musician members. The company would
market the After Master technology to their membership allowing them to master
their music at an affordable price. This would generate significant revenues for
our company.
A third and very significant opportunity for the AfterMaster technology relates
to its use in consumer products for which there is an audio component (e.g.,
headphones, speakers, televisions). We have received growing interest in the
co-development of further technology that will allow AfterMaster to be embedded
into such consumer electronics. We have recently entered into discussions with
several companies to explore the possibility of the development of such
technology. We expect that such a technology could result in a significant and
recurring licensing revenue opportunity for the Company.
Corporate
In November 2011, existing Board member Frank Perrotti, Jr. was elected to the
position of Chairman of the Board of Directors of Studio One. Mr. Barry
Goldwater, Jr., who previously held this position, remains a member of the
Company's Board. Mr. Perrotti is a successful and well regarded businessman with
proven experience in building corporations organically and through acquisitions.
His experience and leadership has and will be invaluable to the Company as it
continues to capitalize on revenue-generating opportunities and further position
itself for growth.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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In addition to his new position, Mr. Perrotti has provided the Company with a
total of $2,470,000 in loans to assist in the financing needs required to build
and install additional studios.
Despite the overall difficulty of the capital markets over the past several
years, the Company has and continues to raise capital to launch additional
studios and further the advancement of AfterMaster. Such funds are in addition
to the aforementioned credit facility.
Unfortunately, the weak capital markets have constrained our growth and the full
implementation of our business plan for the roll-out of the studios. We expect
to continue raising capital through both equity and debt financings to further
our corporate objectives and create significant shareholder value through our
MyStudio and AfterMaster products. With the improving capital markets, we
believe that we will be able to raise substantial additional capital to execute
the business plan.
MyStudio HD Recording Studios
Studio One has developed MyStudio, a self contained, state-of-the-art, high
definition ("HD") interactive audio/video recording studio designed for
installation in shopping malls and other high traffic areas.
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MyStudio offers consumers true professional recording studio-quality audio and
HD broadcast-quality video with an ease, economy and convenience never before
available to the public. MyStudio is designed for installation in malls and
other high traffic areas. MyStudio and its accompanying website, MyStudio.net,
incorporate into a single entertainment venue some of the best elements of the
world's leading Internet and entertainment properties including video sharing,
social networking and talent-related television programming. MyStudio eliminates
the high cost and technological and logistical barriers inherent in the creation
of high quality production and uploading of video content onto the Internet for
both amateurs and professionals alike.
MyStudio enables users, for a fee, to record up to a five-minute personalized
video with professional-quality backdrop, lighting and sound. The studios
feature Hollywood-style green screen technology, and users can select from over
one thousand HD virtual backgrounds (static and dynamic) and thousands of
licensed karaoke tracks from Sony/ATV Music Publishing, EMI Music Publishing,
Universal Music Group, BMG and others. The studio lighting is custom programmed
for each virtual background, and the sound quality is derived from a specially
engineered acoustic design and a proprietary audio signal sequencing process.
Professional users, such as musicians and entertainers, often pay hundreds or
thousands of dollars for comparable professionally produced audio and video.
Finished videos are available for viewing within minutes of completion of the
recording at MyStudio.net. Videos are protected with a privacy pass-code, and
uses can decide whether to make their videos available to the public or keep
them private. The MyStudio.net website offers users the opportunity to share
videos and create member profile pages in a dynamic social networking
environment. Users may also create links between MyStudio.net and other social
networking sites or their own websites, such as their own small businesses.
MyStudio.net members can enter contests, order free DVDs or CDs of their videos,
download MP3 audio files (restrictions apply), access embedded codes or print
high resolution photos from their video.
MyStudio can be used to create videos for music, modeling, comedy, dating, job
resumes, auditions, and personal messages and greetings. Users can also enter
their videos into industry-sponsored music, casting, modeling and comedy
contests. In addition, the Company has offered various themed holiday greetings,
as well as greetings to U.S. troops overseas.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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Currently there are MyStudio locations included in the greater metropolitan
areas of Phoenix, Honolulu, Nashville, Hollywood, Kansas City, New York and
Denver. In 2011, we placed an order for the manufacturing of fifteen additional
studio chassis to further our roll-out plans. We have since taken possession of
four of those studio chassis, one of which has been installed in the Golden
State Plaza mall located a short distance from New York City. We expect to
receive the balance of the aforementioned studio chassis during fiscal 2012.
MyStudio Business Strategy
We plan to continue installing MyStudio's into key markets throughout the U.S.
followed by a roll-out into international markets. The ease and quality of the
studios have created repeat users and increased traffic to the Company's
MyStudio.net website.
We believe MyStudio offers a service never before available to the public - a
professional quality recording experience at an affordable price. The HD virtual
backgrounds, professional lighting and specially engineered sound cannot be
replicated by users at home or outside a professional studio.
Connect Talent to Talent Seekers. MyStudio provides the aspiring artist or
entertainer with a cost-effective, professional quality platform to showcase his
or her talent. Entertainers often pay hundreds or thousands of dollars for
comparable professionally produced audio and video products. Users can often
afford to make numerous videos to showcase their talents due to relative minimal
price point for using MyStudio. There have been several incidents where users'
videos have allowed them to be discovered by talent agents. MyStudio played an
integral part in the casting process to find talent for the recently introduced
The X Factor in the United States.
The studios provide entertainment recruiters with an entirely new method for
locating talent. Using MyStudio's software casting applications, casting
directors are able to review a standardized and efficient format for judging
talent prospects. This contrasts with the inefficiencies of them receiving,
loading and screening numerous formats of video (i.e., VHS and DVDs) for talent.
Additionally, MyStudio allows prospective contestants the ability to perform
their auditions on their own time and in unlimited quantities versus the current
casting call standard of having only a few moments and a single opportunity in
front of a casting agent. Reality television producers understand that their
shows are only as good as the talent. MyStudio will allow for a greater number
of contestants to try-out for these shows which provides producers with a much
deeper pool of talent.
We have focused significant efforts on this aspect of our business model and
have formed strategic partnerships with Simon Cowell's The X Factor, Mark
Burnett Productions, Back Stage Casting and RealityWanted.com. Each of these
partnerships is discussed in greater detail herein.
Build an Online Community Featuring User-Generated Content.
MyStudio.net captures the social networking phenomena Facebook and video sharing
of YouTube and combines it with a superior audio/visual experience. The
MyStudio.net website allows users to create personal profiles, share videos with
family and friends and make their videos available to the public, all of which
encourage user loyalty and viral growth opportunities.
Expand the MyStudio Concept into New Vertical Industries. The potential
utilization of the recording studios extends well beyond the entertainment
industry. The studios can facilitate efficiency, personalization and
differentiation in many industries including professional recruitment and
staffing, Internet dating, corporate training, online greeting cards and
business promotion. We expect to develop future partnerships for content and
users with recruiting, dating and greeting card companies among others.
MyStudio Business Model
Our "bricks and clicks" business model is currently based upon two primary
sources of revenue: recording session fees from MyStudio and advertising revenue
from both the individual studios and the MyStudio.net website. We plan to
continue driving recording session revenue through the use of industry-sponsored
music, modeling and talent contests with new and repeat users, as well as the
installation of additional studios. Additional studios are expected to drive
exponential traffic to the MyStudio.net website as each new video generates a
greater number of unique website visitors due to the potential viral effect of
our video sharing offering.
Our management team believes that the Company's success depends on our ability
to raise additional capital, deploy multiple studios and continue to create
strategic partnerships that drive traffic to the studios. Our current installed
base of seven studios is insufficient to generate adequate revenues to achieve
overall profitability for the Company. By deploying multiple studios and gaining
"critical mass", we believe that we will be able to successfully implement our
business plan, attract a greater number of strategic partnerships and achieve
profitability.
Recording Session Revenue. Each studio is designed to record videos during a
mall's operating hours, which can average 11 hours per day. MyStudio charges a
fee per session for use of the studio. Each session lasts up to five minutes.
There are two pay stations on the studio to expedite the song and background
selection and payment process. Additionally, users may prepay their sessions
from home and have an opportunity to select from a greater variety of songs and
backgrounds. These payment options increase throughput for those using the
studio.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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MyStudio offers over 1,000 HD backgrounds from which to select or users may
provide their own backgrounds. Additionally, MyStudio currently offers thousands
of songs licensed from Sony/ATV Music Publishing, EMI Music Publishing,
Universal Music Group and others for karaoke usage and expects to announce
additional music licensing agreements in the future. In many instances, users
perform their own songs using their guitar, keyboard or other instruments, which
may be plugged into the studios for a professionally sounding quality video.
On-Studio Advertising Revenue. The exterior of the studios contain eight (8) 37"
LCD flat screen monitors that are used to promote MyStudio and display
advertising messages from selected sponsors and third party advertisers. We have
successfully sold advertising on the studios, and we believe that we will be
able to secure national advertising sponsors when we have a greater number of
studios in operation. As a result of recent high-profile partnerships, we are in
discussions with numerous parties that have expressed an interest in advertising
on the studios. Such parties recognize the high traffic of the studios based on
their placement within their respective malls.
Website Advertising Revenue. Visitors, visitor demographics and time spent on a
website are the primary drivers behind advertising-based revenue models for
Internet properties. The user-generated content created in MyStudio is the
traffic generator for the MyStudio.net website.
We expect web traffic to grow substantially as additional studios are launched.
We believe that our web property can create significant value for our
shareholders. The leading social media websites, such as Facebook, have created
substantial valuations for themselves based on website advertising. Unlike a
number of other social media and Internet companies, we are not solely dependent
upon website advertising to generate revenues. Our more diverse "bricks and
clicks" business model allows our shareholders to benefit from multiple revenue
streams, with the website being just one of the Company's valuation drivers.
MyStudio Marketing and Promotion Strategy
Our business plan calls for the establishment of regular events, auditions and
contests to drive traffic to the studios; this has been confirmed by a marked
increase in studio traffic when contests and promotions have been offered. Our
marketing and promotion strategy is designed to drive traffic through the
studios which in turn drives traffic to the MyStudio.net website.
To date, we have not invested significant dollars for marketing as we believe
such marketing efforts would not have been prudent without a national footprint
for MyStudio. We expect to significantly increase our national marketing efforts
to drive sponsorship and advertising revenues later in the current fiscal year.
With a broader installed studio base in major metropolitan markets, we believe
that we will have a much greater opportunity to gain national attention of large
sponsors who understand the opportunity to partner with MyStudio for contests
and auditions to favorably market their own businesses. To date, we have
successfully sold sponsorships that have led to increased utilization of the
studio, as well as advertising monies.
We remain focused on forming strategic partnerships at the local, regional and
national level with talent seekers (the television, music, film, performing arts
and modeling industries), the media (radio and television stations and printed
media) and corporate sponsors who may seek access to our expanding user base.
Such partnerships are designed to generate industry-sponsored music, modeling
and talent contests to stimulate trial of and demand for the studios.
MyStudio has successfully partnered with some of the top names in the
entertainment business, as described below.
In April 2011, we announced a groundbreaking multi-year partnership with Simon
Cowell's The X Factor, the most significant partnership yet announced by the
Company. We believe that the agreement represents a very significant milestone
for the Company and demonstrates that the Company has established its ability to
partner with some of the most important entities in the music and entertainment
businesses.
Led by Mr. Cowell, a highly acclaimed entertainment entrepreneur and music
producer with a notable ability to identify some of the world's top musical
talent, The X Factor has had tremendous success in Europe. The show debuted in
September on the Fox Network and has quickly generated a very significant
following throughout the U.S. The high quality of the talent selected to
participate in the show has been a key source of fan enthusiasm for the show.
It has been reported that over 75,000 people auditioned for the show, including
several thousand who participated in such auditions through MyStudio. Mr. Cowell
recognized the significant opportunity provided by MyStudio in broadening the
contestant base for his show. MyStudio allowed for contestants to visit six
additional venues beyond the primary casting cities to participate in the
audition process. As we install additional studios throughout the U.S. during
fiscal 2012 and beyond, we believe MyStudio will play an even greater role in
the identification of top talent for such television shows.
We are pleased to report that of the enormous group auditioning for the show,
three of the acts using MyStudio made it into the show's final 32 contestants,
and one of those acts advanced to the final 6 remaining contestants. We believe
that this further validated that MyStudio creates an important platform for
those seeking to audition for reality television shows or any other music,
acting, comedy or modeling-related opportunities.
The partnership with The X Factor demonstrated that the MyStudio recording
studios are an efficient means for allowing for a broad number of people in
multiple cities to try out for reality television shows. Accordingly, we expect
television, theater and motion pictures to begin to follow Mr. Cowell's lead in
utilizing this technology to enhance their casting processes and thereby
creating the potential for a number of other strategic partnerships for the
Company.
22
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
Our participation with The X Factor has allowed the Company to gain national
attention for its studios without having to expend significant amounts of
internal funds to achieve a comparable level of positive exposure and brand
development.
Prior to the recently announced auditions for The X Factor, we completed a
multi-year agreement with Mark Burnett Productions ("MBP"), which provided for
the use of MyStudio to augment the casting of the MBP television shows. MBP has
used MyStudio in the casting of its shows, including Are You Smarter Than a
Fifth Grader and Bully Beatdown. MBP is a leading production company for
primetime television, cable and the Internet, and has produced over 1,100 hours
of television programming which regularly air in over 70 countries around the
world.
MyStudio was used by entertainment leaders Simon Fuller, Perez Hilton and Jamie
King in their casting for Boy Band, a contest to identify five males between the
ages of 13 and 21 with outstanding dance and vocal talent to form a high profile
band. Mr. Fuller is the producer of American Idol. Mr. Hilton is a famous
celebrity gossip columnist with a very extensive following. Mr. King is a world
renowned choreographer. MyStudio was selected by Boy Band for the convenience
and ease by potential contestants and was responsible for finding one of the Boy
Band members.
In addition to Boy Band, Mr. Fuller, through 19 Entertainment and MySpace, used
MyStudio for the auditions of If I Can Dream, a reality television show offered
through Hulu.com. The studios were used by a number of aspiring artists to
perform their audition demos in hopes of being selected to join this show.
We have completed a strategic partnership with RealityWanted.com, a leading
source for reality TV casting calls in the U.S. The partnership provides for
members of both companies to create audition videos for hundreds of top reality
television shows. Most reality TV applicants are missing one of the most
critical components to being selected - the video. This partnership created a
turnkey reality TV casting platform to help complete the casting process. Users
can easily supplement their RealityWanted.com profiles with a high-quality video
that better conveys their talents and unique personality traits giving them a
greater chance of being selected for a reality television show. As MyStudio
offers over 1,000 high definition backgrounds, users can pick an environment to
best suit their audition.
We have also established a partnership with Back Stage Casting., the
entertainment industry's most recognized resource for real-time casting and
audition information, acting advice, job listings and entertainment news.
Utilizing MyStudio, Back Stage is able to offer its members and audition pieces
for specific casting calls. Film, theater and television productions are asking
actors to submit audition videos specific to their projects to streamline the
casting process and identify the most talented candidates. MyStudio offers
actors a high quality, convenient and inexpensive way to create their
professional videos and increase their chances of being selected.
In addition to casting for television and stage, we completed a multi-year
partnership with The GRAMMY Foundation to host auditions for various GRAMMY
Foundation programs. The studios were used for auditions and promotions relating
to several GRAMMY Foundation programs for young people including GRAMMY Camp®,
GRAMMY® Signature Schools and the GRAMMY Jazz Ensembles.
A number of contests using MyStudio have been sponsored by some high-profile
music, modeling and comedy companies. We expect to continue entering into
additional strategic partnerships with other high profile companies in the
music, television, modeling and comedy fields to further traffic to our studios.
Licensed musical content is another facet in our marketing and promotional
strategy. In July 2008, we entered into a multi-year licensing agreement with
EMI Music Publishing ("EMI") which grants us access to EMI's extensive music
catalog. Notable EMI artists include Madonna, Stevie Wonder, Reba McEntire,
Beyonce, Kelly Clarkson, Alicia Keyes and Elvis Presley. The agreement allows
users to legally incorporate popular music from one of the world's largest music
publishers into their creative endeavors, synchronizing music, voice and video
into a single format. Subsequent agreements with Sony/ATV Music Publishing, BMG
and Universal Music Group have since been signed to further expand the karaoke
catalog. We are currently in the process of adding over one thousand new musical
tracks to our existing catalog, which will provide our users with a greater and
more current selection of music.
We continue to aggressively pursue additional reality TV, music, modeling and
comedy audition opportunities.
AfterMaster HD Audio
We have developed a revolutionary audio mastering technology branded
AfterMaster, for which the technology is held by AfterMaster HD Audio Labs,
Inc., a wholly-owned subsidiary of the Company. We believe that the AfterMaster
process for mastering audio makes music significantly louder, fuller and clearer
than traditionally mastered music. The technology is a proprietary,
patents-pending combination of hardware and software which was developed by our
audio engineering team. It can be applied on virtually all audio sources
including, music, radio, television and film.
The AfterMaster process can be used to create both a master from a master audio
mix or to "AfterMaster" existing music that has already been mastered. The
technology allows any mastered audio to be remastered without the need to access
the master mix. The business model includes the mastering and "AfterMastering"
of both new music releases as well as catalog music. We believe that AfterMaster
can be the technological impetus that can revitalize the music industry by
providing consumers with a new leap in sound quality and added value. Some music
industry experts who have recently been introduced to our technologies have
equated it with high definition television: this technology has the opportunity
to do for music what HD has done for television.
23
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
The first commercial music release utilizing the AfterMaster technology was
Janet Jackson's hit single, "Make Me". This song was released by Universal Music
and produced by nationally recognized record producer Rodney Jerkins. Additional
songs, including music by Lady Gaga, Ray J and Shontelle have since been
released using our technologies. Advisory Board members Rodney Jerkins, Richard
Perry and Jason Flom are very influential in the music community and are
instrumental to the execution of the AfterMaster business plan. Additionally,
Advisory Board member Charles Weber, the first CEO of Lucasfilms, will be
instrumental in the marketing and adoption of AfterMaster for motion pictures
and television.
We have spent much of our time to date primarily focused on employing the
AfterMaster technology for music - both existing catalogue and new releases. We
believe our technology has the potential for the record labels to generate
significant additional revenue from the re-release of their catalogues, while
providing listeners with a better listening experience. The feedback from the
record labels has been very favorable. We are in discussions with major record
labels regarding the use of our technologies for broad commercial use.
In addition to our focus on utilizing AfterMaster for professional use by the
music industry, we are introducing a version of the technology for use by
amateur musicians and other consumers. Consumers will be able to upload their
music through a specially designed AfterMaster website and have it mastered with
unprecedented quality at an affordable price point. We priced this product to
appeal to a very broad audience, both domestically and internationally. We are
currently in negotiations with a well known social media networking company,
with a membership over 5 million amateur musicians, to offer AfterMaster to
their membership at an affordable price.
A third and very significant opportunity for the AfterMaster technology relates
to its use in consumer products for which there is an audio component (e.g.,
phones, stereo speakers, car speakers). We have received growing interest in the
co-development of further technology that will allow AfterMaster to be embedded
into consumer electronics. We have recently entered into an agreement with a
leading consumer electronics company to explore the possibility of the
development of such technology. We expect that such a technology would result in
a significant and recurring licensing revenue opportunity for the Company.
Manufacturing
Last fiscal year, we announced that we had contracted for the manufacture of 15
of its proprietary studio chassis. We have since taken possession of the first
four of such chassis. This agreement has allowed us to realize substantial
studio cost savings relative to the prior manufacturer. We intend to continue
financing additional studios through additional capital raises and continued
borrowings from current lenders.
We continue to evaluate our other vendors to identify additional cost savings
for the studios.
Intellectual Property and Licensing
We have embarked on an aggressive intellectual property program including the
filing of numerous foreign and domestic patent applications and trademark
applications with the U.S. Patent and Trademark Office all designed to protect
what we believe is innovative and proprietary technology. We also enter into
confidentiality and invention assignment agreements with our employees and
consultants and confidentiality agreements with third parties, and we rigorously
control access to proprietary technology. We currently have one patent approved
with numerous patents and trademarks pending.
Employees
As of December 31, 2011, we employed 11 full-time and 7 part-time employees,
including attendants at the MyStudio locations. We expect to seek additional
employees in the next year to handle anticipated potential growth.
We believe that our relationship with our employees is good. None of our
employees are members of any union nor have they entered into any collective
bargaining agreements.
Facilities
Pursuant to a lease originally dated January, 2006, we currently occupy
approximately 11,800 square feet of office space located at 7650 E. Evans Rd.,
Suite C, Scottsdale, Arizona on a month-by month basis. The total lease expense
is approximately $9,609 per month, payable in cash and Common Stock of the
Company.
We are leasing office space on a month-to-month basis in West Hollywood,
California. We also lease an office in Los Angeles for use by our audio team in
connection with our AfterMaster product. This is a two-year lease expiring on
July 31, 2013. The total lease expense for both facilities is approximately
$13,500 per month, and the total remaining obligations under these leases at
December 31, 2011 were approximately $29,400.
We lease space at mall locations for MyStudio generally pursuant to one-year
leases. The monthly rent for these spaces is at market rates commensurate with
other kiosk operations. As we expand, we will continue to secure space for our
recording studios at various venues and locations throughout the country.
24
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
RESULTS OF OPERATIONS
Revenues
Three Months Ended Six Months Ended
December 31, December 31,
2011 2010 2011 2010
Session Revenues $ 41,211 $ 113,340 $ 51,961 $ 206,510
Advertising Revenues 20 1,500 2,016 9,000
AfterMaster Revenues 24,500 16,600 56,900 18,800
Total Revenues $ 65,731 $ 131,440 $ 110,877 $ 234,310
Our business model currently generates revenues from four primary sources:
1) Paid user fees from customers who utilize the
studios to create an audio/video recording;
2) Advertising revenue from the external monitors
located on each MyStudio facility;
3) Advertising revenue from our website; and
4) AfterMaster revenue.
The revenues from each of the first two of these sources are expected to
increase proportionally to the number of studios we place in operation. The
revenue from advertising on the website will depend on the number and length of
visits to our website by MyStudio users and other viewers. Revenues from
AfterMaster services resulted primarily from audio services provided to
producers and artists on a contract basis. This source of revenue is expected to
grow in coming years, and the Company is expecting to generate additional
revenues from pay-per-play downloads.
Revenue for the three and six month periods ended December 31, 2011 decreased as
compared to the comparable three and six month periods ended December 31, 2010
due primarily to a decrease in barter income activity.
Cost of Sales
Three Months Ended Six Months Ended
December 31, December 31,
2011 2010 2011 2010
Cost of Sales (excluding
depreciation and amortization) $ 221,894 $ 118,601 $ 410,329 $ 239,806
Cost of sales consists primarily of studio rent, attendant labor and Internet
connectivity and excludes depreciation and amortization on the studios. The
increase in cost of sales for the three and six months ended December 31, 2011,
over the comparable period for the prior fiscal year, is attributable,
primarily, to the operation of additional studios during the current year.
Other Costs and Expenses
Three Months Ended Six Months Ended
December 31, December 31,
2011 2010 2011 2010
Cost of barter exchanges $ 23,500 $ 102,800 $ 23,500 $ 177,050Depreciation and amortization expense 120,750 83,246 231,630 157,624
General and administrative expenses 1,043,391 1,120,995 2,138,355 2,361,472
Total
$ 1,187,641 $ 1,307,041 $ 2,393,485 $ 2,696,146
As a result of a decrease in barter transactions during the three and six month
periods ended December 31, 2011, our costs of barter exchanges
decreased. Depreciation and amortization increased due to additional studios in
operation during the current periods.
General and administrative expenses consist primarily of compensation and
related costs for our finance, legal, human resources, and information
technology personnel; advertising expenses; rent and facilities; and expenses
related to the issuance of stock compensation.
The overall decreases in general and administrative expenses are primarily a
result of decreases in advertising expenses and professional fees.
Advertising expense decreased in the three months period ended December 31, 2011
to $9,676 vs. $33,532 in 2010; and the six months ended December 31, 2011 to
$95,432 vs. $234,181 in 2011.
25
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
Professional fees also decreased from $753,213 and $1,567,156 during the three
and six month periods in 2010 to $673,026 and $1,372,808 during the three and
six month periods in 2011. The decrease in professional fees is primarily
attributable to our issuing less Common Stock and warrants to various employees
and consultants for services rendered during the period. This decrease in
professional fees and advertising was partially offset by an increase in wages
and other general and administrative expenses resulting from the installation
and deployment of the new studios.
Other Income and Expenses
The other income and expenses during the three and six month periods ended
December 31, 2011, totaling $338,045 and $581,419 of net expenses consisted
almost entirely of interest expense. During the comparable periods in 2010,
other income and expenses totaled $177,044 and $264,074. Interest expense has
increased primarily due to non-cash interest expense relating to warrants
attached to recent debt issuances, as well as conversion features included in
recent convertible debt issuances. These additional borrowings have been used to
build and deploy additional studios.
Net Income/(Loss)
Three Months Ended Six Months Ended
December 31, December 31,
2011 2010 2011 2010
Net Income/(Loss) $ (1,681,971 ) $ (2,114,521 ) $ (3,274,165 ) $ (3,535,489 )
Due to the Company's cash position, we use our Common Stock and warrants to
purchase Common Stock to pay many employees, vendors and consultants as well as
to raise capital through incentives attached to our debt offerings. Once we have
raised additional capital from outside sources, as well as generated cash flows
from operations, we expect to reduce the use of Common Stock as a significant
means of compensation. Under FASB ASC 718, "Accounting for Stock-Based
Compensation", these non-cash issuances are expensed at the equity instruments
fair market value. Absent these large non-cash expenses, our net loss would be
$2,161,788 and $1,688,210 for the six month periods ended December 31, 2011 and
December 31, 2010, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company had revenues of $110,877 during the six months ended December 31,
2011 as compared to $234,310 in the comparable period of 2010. The Company has
incurred losses since inception of $32,948,748. At December 31, 2011, the
Company had negative working capital of $1,395,393, which was a decrease in
working capital of $494,104 from June 30, 2011. The decrease in the working
capital was primarily due to additional short-term borrowings that were used to
finance non-current fixed assets.
The future of the Company as an operating business will depend on its ability to
obtain sufficient capital contributions and/or financing as may be required to
sustain its operations. Management's plan to address these issues includes a
continued exercise of tight cost controls to conserve cash and obtaining
additional debt and/or equity financing.
As we continue our activities, we will continue to experience net negative cash
flows from operations, pending receipt of significant revenues that generate a
positive sales margin.
The Company expects that additional operating losses will occur until net
margins gained from sales revenue is sufficient to offset the costs incurred for
marketing, sales and product development. Until the Company has achieved a sales
level sufficient to break even, it will not be self-sustaining or be competitive
in the areas in which it intends to operate.
In addition, the Company will require substantial additional funds to continue
production and installation of the additional studios and to fully implement its
marketing plans.
The Company's management team believes that its success depends on the Company's
ability to raise additional capital, deploy multiple studios and create
strategic partnerships that drive traffic to the studios. The Company's current
seven studios are insufficient to generate adequate revenues to achieve overall
profitability for the Company. By deploying multiple studios, the Company
believes that it will be able to successfully implement its business plan,
attract a greater number of strategic partnerships and achieve profitability.
As of December 31, 2011, the existing capital and anticipated funds from
operations were not sufficient to sustain Company operations or the business
plan over the next twelve months. We anticipate substantial increases in our
cash requirements which will require additional capital to be generated from the
sale of Common Stock, the sale of Preferred Stock, equipment financing, debt
financing and bank borrowings, to the extent available, or other forms of
financing to the extent necessary to augment our working capital. In the event
we cannot obtain the necessary capital to pursue our strategic business plan, we
may have to significantly curtail our operations. This would materially impact
our ability to continue operations. There is no assurance that the Company will
be able to obtain additional funding when needed, or that such funding, if
available, can be obtained on terms acceptable to the Company.
26
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
Recent global events, as well as domestic economic factors, have recently
limited the access of many companies to both debt and equity financings. As
such, no assurance can be made that financing will be available or available on
terms acceptable to the Company, and, if available, it may take either the form
of debt or equity. In either case, any financing will have a negative impact on
our financial condition and will likely result in an immediate and substantial
dilution to our existing stockholders.
Although the Company intends to engage in a subsequent equity offering of its
securities to raise additional working capital for operations and studio
manufacturing, the Company has no firm commitments for any additional funding,
either debt or equity, at the present time. Insufficient financial resources may
require the Company to delay or eliminate all or some of its development,
marketing and sales plans, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There is no
certainty that the expenditures to be made by the Company will result in a
profitable business proposed by the Company.
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